VDAS BOON OR BANE ON THE GOVERNMENT TO DECIDE!

The blockchain and research firms, [1] Chainalyis and Finder ranked India 2 in Global cryptocurrency adoption index in October 2021 and February 2022. This ranking was outdone by Vietnam, trailed by India and Pakistan. In another study, they named Australia as the leader in Cryptocurrency ownership followed by Ghana. As far as India was concerned, the Cryptocurrency ownership vis-à-vis Global ownership has increased from a measly 14.7 per cent to a 23.4 per cent in January 2022 and subsequently to 29.9 per cent in April 2022. This is enough to estimate the impact of India in the Cryptocurrency arena!

Lately, NFTs, have also created a buzz in the market! A lot of money has been made with simple images of apes, collages, three white dots against a black background etc. [2] The costliest NFT (Beeples' 'The First 5000 days') sold till date to a single buyer amounts to a whopping $69 million (INR 539 Crores!) while the costliest NFT (Pak's 'The Merge') sold till date by a single seller to multiple buyers amounts to a mind boggling $91.8 m (INR 716 Crores). Merely, one year after this sale, Christie's auction house located in Mumbai, India has crossed $ 100 million in NFT sales.

Enough Said. What are these NFTs and cryptocurrencies???

Since the stakes involved are humongous, one must understand what an NFT is. Before deep diving into NFT, a small brief about blockchain would help us understand NFTs better. Blockchain plays a vital role in the cryptos and NFTs – to maintain an extremely secure and decentralized (no centralized entity for supervision and decision making!) record of transactions. Blockchain consists of “Blocks” that stores information and the information set in it gets linked to the previously formed block thus, forming a Blockchain.

Now, coming back to what an NFT is. NFT is a Virtual Digital Asset (VDA) that is nonfungible (unique) and has a unique id. NFTs represent and emulates art, music, videos etc. Accordingly, it helps the NFT owners to own the original items i.e., artwork, music works/records, sports memorabilia, collectibles etc.

Similarly, Cryptocurrency is a form of VDA which make use of cryptography (mechanism for securing information!) to help secure transactions. Further, such currencies do not have a central issuing authority (decentralized) and functions on blockchain technology just like NFTs.?

Functionality and Storage

virtually/digitally or rather without owning them physically. NFT functions on the blockchain technology and provides proof of ownership via its authentication mechanism. However, unlike cryptocurrency they cannot be traded at equivalent values (i.e., bitcoin can be exchanged for bitcoin). NFTs can be bought at various popular online marketplaces like Opensea, Nifty gateway etc. Once bought, it would be essential to store an NFT in a digital wallet. Coinbase, Alphawallet amongst others offer a digital solution for safe storage of NFTs.

NFT FRENZY! NFT around the world!

Our very own Mahanayak, Shri Amitabh Bachchan was one of the first Bollywood actors to take the plunge. He auctioned some of his late father's poems and some of his own collectibles as NFTs. Other actors like Salman Khan, Kamal Hasan, legendary Rajnikant as well as our favourite cricketers like Rohit Sharma, Dinesh Karthik soon followed suit. [3]

In the west as well, Jack Dorsey (co-founder and ex-CEO of twitter) sold his first tweet for a mind boggling $2.9 Million (INR approx. 23 crores). International sportsmen have also made the most of this frenzy – LeBron James (basketball player) sold a video of his slam dunk for $200,000 (INR Approx 16 lakhs). Not just this, the National Basketball Association (NBA) collected video highlights from live games and converted them to memorabilia that fans can collect and trade..such highlights has generated $ 600 million in sales. Such huge craze has led to NFT sales being recorded at $10.7 bn in third quarter of 2021; more than 8 times higher than the previous quarter!!! [4]

But are these legal?

Due to its usage in the dark web and other regulatory issues, Bitcoin has not been a popular contender for gaining recognition as a legal tender. However, El Salvador has taken everyone by surprise and has become the first country that has recognized bitcoin as its legal tender. Various other countries around the globe like France, Denmark, Germany, Iceland, Spain, Mexico, the United Kingdom, and Japan have considered bitcoin transactions as legal and have developed various rules and regulations revolving around such transactions. [5]

While in the US, the US Treasury has been issuing guidance for usage of Bitcoins and have guided that bitcoin can be exchanged for like value of a different currency. Lately, abi-artisan cryptocurrency bill aimed at increasing federal oversight over the budding and increasingly popular cryptocurrency and digital asset industry has been launched. It would make use of digital assets easier in their daily lives.

There has been significant development in the Crypto space in the last few years where certain countries have extended an implicit or absolute ban on cryptocurrency, a certain country has declared it as legal tender while some countries are looking to do the same. Further, certain countries are taking transacting in cryptocurrency lightly i.e., no measures to counter terrorism or money laundering with the help of cryptos. While An Implicit ban would refer to a ban where banks /financial institutions are prohibited from dealing in cryptos, also, crypto exchanges are prohibited from functioning, an absolute ban refers to a ban where cryptocurrencies are illegal.

The list of countries that have banned cryptos as well as those that have not adopted any measures for money laundering has been tabulated below Moreover, China has banned crypto trading as well crypto mining. Surprisingly, prior to placing ban on crypto mining, at least two-thirds of the mining took place in China. Now, the US is the largest market for Crypto Miners. [6] Similarly, the legality of NFTs is under question. NFTs as discussed above, gives rights to a specific item underlying such purchase. One angle that creeps in, in the case of NFT is the access to Intellectual Property rights (IPR) related to those specific goods. The US has with a view to develop a national policy for Digital Assets has issued 'Executive Order on Ensuring Responsible Development of Digital Assets' recently. Draft legislation is underway which shall give more clarity on what NFTs are as a means to manage IPRs and other purposes.

Where does India stand amongst all of this? Does it have an Implicit ban for now and it is heading towards an absolute ban? Only time will tell…

India and its saga with Cryptos

Thanks to the Supreme Court judgement in Internet and Mobile Association of India v. Reserve Bank of India Citation, temporary relief was provided to the crypto world in India since quite a few banks were blocking the buyers from making payments to crypto exchanges for purchase of Crypto currencies. Such banks had also blocked the bank accounts of various crypto exchanges prior to issuance of the Supreme Court judgement.

The Indian Government and the Crypto world have always been at logger heads for a long time. Last year, the Indian Government has suggested on regulating Crypto Currency via the Cryptocurrency and Regulation of Official Digital Currency Bill, 2021, which is yet to be tabled by the Government. Further, such a bill would also lay down the foundation for creation of an official digital currency to be issued by the RBI. The Bill intends to regulate all private crypto currencies in India. Being the sixth largest economy in the world, would legalizing Crypto be a progressive or a regressive move?

Finance Bill, 2022: A new beginning for VDAs in India?

On February 01, 2022, via the Finance Bill 2022, the Government raised the curtain and brought all the virtual assets in the ambit of direct taxation. The Government defined 'virtual digital assets' (VDA) which included cryptocurrency as well as Non-Fungible Tokens. Further, it was also stated that the Government vide notification can also exclude certain assets from the definition of virtual assets. As per the Hon. Finance Minister's speech, “The magnitude and Frequency have made it imperative for a specific tax regime”. Accordingly, with effect from April 1, 2023, the Government introduced levy of income tax on virtual digital assets which include cryptocurrency and NFTs. The Finance Bill, 2022 is indicative of the aspect that the Government intends to regulate NFTs and cryptocurrency. However, with the Government's intention to launch Central Bank Digital Currency (CBDC), the Government has hit two birds with one stone – one bird being putting the crypto world's future in jeopardy with regressive tax system and the other being introducing its own digital currency.

Introduction of taxability, no set off against other incomes or same income nor any carry forward possible of such loss from sale of VDA, gives us a glimpse of the approach that the Government intends to adopt in respect of Cryptocurrencies and NFTs. The Government has hinted that the assessee would get into such transactions at his own expense.

Now that the Government has cleared its position on Cryptos with respect to income tax, it would be imperative to understand its position on applicability of GST on VDAs especially cryptos and NFTs.

GST Implications on transacting in Cryptos - Primarily, there is no doubt on the Government's intention to tax cryptos and NFTs under GST. The same is evident from the below two instances:

Previously, The Central Economic Intelligence Bureau (CEIB) in year 2020 had proposed to the CBIC that the cryptocurrency market in the country would reach at about Rs 40,000 crore and suggests to classify bitcoins as 'intangible asset' and levy GST @18% on margins made while trading in such currency. However, there are no concrete steps taken by the CBIC in this regard. [7] Even, in 2021, a question was posed before the finance ministry in the parliament – 'whether the earnings from cryptocurrencies is being subject to tax'? To which the ministry replied that any income irrespective of where it is derived from should be offered to income tax; hence, any profits or gains from dealing in cryptocurrencies should be subject to income tax. The ministry added, that any supply of goods or service which has not been exempted would be liable to GST; no supply in relation to crypto currency has been exempted from GST specifically.

A grapevine also did rounds in media in March 2022, wherein GST officers at the condition of not being named said that the Government is pondering upon levying 28% GST on cryptos and NFTs. [8]

But how will VDAs be taxed? Where do they get classified in terms of GST law? For the purpose of levy of GST whether cryptocurrency would be goods or services or be classified as an actionable claim and not subjected to GST? Whether it can form a part of 'Money'? Moreover, would VDAs be considered as intangible assets for the purpose of GST?

Let us try to find the answers to the above questions in relation to cryptos and NFTs in accordance with GST: Firstly, let us analyse whether NFTs/ cryptos can be classified as goods or services. As per section 2(52) of CGST Act, 2017, “'goods' mean every kind of movable property other than money and securities but includes actionable claim….” Therefore, in order to be classified as goods it is imperative to exclude NFTs from money, securities and actionable claim. As per Section 2(75) of CGST Act, 2017, “Money means the Indian legal tender or any foreign currency, …. any other instrument recognised by the Reserve Bank of India when used as a consideration to settle an obligation or exchange with Indian legal tender of another denomination but shall not include any currency that is held for its numismatic value.”

Basis the above definition, one can infer that unless NFTs/ Cryptocurrencies are legal Indian tender, or any foreign currency, or they have been recognised and notified by RBI, VDAs cannot be classified as 'Money'. Next, it would become important to analyse whether NFTs/ Cryptocurrencies can be classified as 'Securities'. Since the definition of securities under GST Act points towards the definition of securities as per securities contracts act, it must be reproduced here: Further, Sec 2(h) of Securities Contracts (Regulation) Act 1956, defines “Securities” as under: “Securities” include-

(i) shares , scrips , stocks , bonds , debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ia) derivatives;

(ib) units or any other instruments issued by any collective investment scheme to the investors in such schemes;

(ii) government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interest in securities.”

However, since NFTs/ Cryptocurrencies do not fall under any of the points above, NFTs cannot be classified as “Securities”.

Finally, let us discuss whether VDAs can fit in the definition of “Actionable Claims”. Since GST Act refers to Transfer of Property Act for the same, reliance can be placed there:

As per section 3 of Transfer of Property Act, 1882, 'actionable claim' means “a claim to any debt, other than a debt secured by mortgage of immovable property or by hypothecation or pledge of movable property, or to any beneficial interest in movable property not in the possession either actual or constructive, of the claimant,…..”

The question that arises here is whether NFTs can be called as 'actionable claims' as the owners of the same have beneficial interest in a movable property (underlying asset on which NFT is created). Similarly, what would cryptocurrency be? The crypto industry has represented that SEBI should be the regulatory body for cryptos, however nothing has been finalised as yet! Infact, SEBI has recently, expressed that it would be challenging for them to safeguard the interest of consumers and enforce any regulatory regime owing to their decentralised nature.

In view of the above discussion, the GST Council must at the earliest provide clarity on levy of GST on Cryptos and NFTs, its valuation and rate of tax. Further, some FAQs/clarification on applicability of GST on sale of Cryptos and NFTs, levy, its valuation etc would be very helpful. Without releasing FAQs/clarification, the tax authorities are left without jurisdiction and the taxpayers are left helpless when a notice is issued for recovery of GST on sale of Cryptos and NFTs.

Conclusion: Post Finance Budget 2022, the future of Cryptos and NFTs in India looks tax-expensive basis the taxation imposed, no set off against another head or same head permitted nor any deduction of expenditure against the income permitted. Similar rules may soon creep in from GST perspective also. We are expected to play the Wait and Watch game till the Govt takes the next step. Any effort to subject Cryptos to GST at the highest slab would create an uproar in the market. However, keeping in mind the measures taken in Finance Act, 2022, taxpayers should brace themselves for a jerk since similar measures may be expected under GST provisions. But as Sylvester Stallone has famously said, “It ain't over till it's over”, all taxpayers should hold their horses and be optimistic in hope of any relief.

Sources : [1]https://timeso
ndia.indiatimes.com/business/cryptocurrency/blockchain/cryptocurrency-adoptionindex-and-patterns-in-india-
nders-report-april-2022/articleshow/91795988.cms. [2]https://www.business2community.com/nft/mostexpensivenft#:~:text=Finally%2C%20the%20most%20 expensive%20NFT,(which%20were%20single%20NFTs). [3] https://economictimes.indiatimes.com/magazines/panache/from-big-b-to-rajinikanth-2021-was-theyear-of-nft-craze-for-indian-celebrities/articleshow/88524421.cms [4] https://economictimes.indiatimes.com/tech/technology/nft-sales-surge-to-10-7-billion-in-q3-ascrypto-asset-frenzy-hits-new-highs/articleshow/86772103.cms [5]https : / /www.
nsmes . com/2022/03/whi ch- countries -have- legal i zed- the-use- of - bitcoin.html#:~:text=El%20Salvador&text=Other%20countries%20like%20France%2C%20Denmark,aro und%20its%20use%20and%20trade. [6]https://decrypt.co/89148/over-50-countries-have-placed-bans-on-crypto-library-of-congress-report. [7] https://www.businesstoday.in/latest/economy-politics/story/centre-may-impose-18-percent-gst-onbitcoin-trading-282951-2020-12-29 [8]https://www.
nancialexpress.com/digital-currency/28-gst-on-cryptocurrency-another-shocker-forcrypto-community-in-india/2517642